Venture capitalists pass on board seats to secure deals in hot crypto start ups

Jack Lu received eight proposals for the first major investment in Magic Eden, his cryptocurrency startup, but only one of them asked for a stipulation that’s usually standard in similar tech deals: a seat on the company’s board.

By the end of the process this month, the cryptocurrency investment company Paradigm had reached an agreement to lead a $27 million funding round ahead of well-known Silicon Valley companies including Greylock Partners and Sequoia Capital. Paradigm decided not to join the board.

“There was deep trust between the two teams,” Lu said. “There was a lot of spiritual direction in what we wanted to do.”

The arrangement is becoming increasingly common in the free-roaming world of cryptocurrencies, as investors compete to grab stakes in hot startups poised to capture large slices of the fast-growing market.

More than 400 cryptocurrency startups have raised Series A funding in the past three years without another subsequent round of funding. Half of them had just one or two directors on their boards, according to an analysis by PitchBook, which uses public filings and company disclosures to compile the data.

Most non-cryptocurrency startups had at least three directors at the time, according to PitchBook data.

Venture capitalists said it has become normal to pass on board seats in companies focused on digital assets. Many founders want to limit the involvement of outside financiers. A wide swath largely unregulated Projects like so-called “decentralized autonomous organizations” do not even have formal bodies.

The result is that many cryptocurrency startups, one of the fastest growing areas of technology investment, have avoided the same level of investor scrutiny as other large private companies.

Cryptocurrency investor Katie Haun has no plans to personally serve on the boards of many of the companies she supports © Andreessen Horowitz

A relaxed attitude can help venture capitalists close deals and protect them from potential legal obligations related to risky projects. However, some investors said it could also encourage bad government practices.

“I think that’s very short-sighted,” said Rebecca Lynn, general partner at Canvas Ventures. “As investors, we have a duty of loyalty to our limited partners. . . and I’m not entirely sure how that happens when you’re not on the board.”

Many cryptocurrency startups have been able to grow rapidly without raising venture capital, allowing their founders to keep a tight grip on operations. Even some of the best-funded cryptocurrency companies have managed to avoid offering board seats.

Dozens of companies have invested more than $1.8 billion in three financings in cryptocurrency exchange FTX over the past year. The last round of financing estimated the company at $32 billion.

But by the end of quick rounds of negotiations, none of the investors had secured a seat on the board of the three-year-old exchange, according to a listing filing from FTX’s parent company.

Instead, the company has granted a seat on the board of directors to a single outside director, an attorney based at its Antigua and Barbuda headquarters. The only other directors are FTX chairman Jonathan Cheesman and 30-year-old founder Sam Bankman-Fried, who confirmed the accuracy of the filing.

“We value the relationships we have with our investors, but we also think it’s important that corporate governance reflect what is important to the operation and governance of the company, rather than financial contributions,” Bankman wrote -Fried in an email.

FTX’s largest investors include Paradigm, Sequoia, and the private equity group Thomas Bravo. Unlike many similar deals, none of the FTX funding announcements name a “lead investor,” who typically invests most of the money and takes a seat on the board.

Bankman-Fried said most of the company’s “key investors and stakeholders” sit on advisory boards for both FTX and the exchange’s US operations, which meet quarterly.

Some investors said FTX didn’t need much formal guidance because it’s already profitable, giving it the upper hand in deal negotiations.

“They grew so fast, so fast, they could afford to skip some of these things,” said Chris McCann, a partner at early FTX investor Race Capital.

FTX’s larger competitor, Binance, said it is preparing to establish a board of directors “as we continue to evolve from a disruptive tech company into a global financial institution.” It has been pitch to sovereign wealth funds and other large investors for debt financing.

Investors have sometimes avoided taking board seats at start-ups operating in sectors that might attract regulatory attention, such as automotive decentralized funding.

Most DeFi projects release open-source software programs and issue cryptocurrency tokens that allow users, investors, and collaborators to vote on governance proposals. Many venture capitalists still end up owning large token holdings, giving them more leverage than individual investors.

The umbrella organization for global financial regulators has targeted the role of venture capital in DeFi this weekand said many companies are structured in a way that allows founders and investors “to make profits while avoiding financial responsibility for a project’s failure.”

Some VCs said they have also become more relaxed about governance at other companies as start-up founders have gained more influence over the past decade.

However, the rapid pace of dealmaking among cryptocurrency startups in recent years has pushed the boundaries of many top investors even further.

Katie Haun, a cryptocurrency investor which raised $1.5 billion for two new funds this week, said she has no plans to personally serve on the boards of many of the companies that receive her support. Haun said she will focus on existing board seats at startups like NFT marketplace OpenSea.

Instead, she plans to delegate director positions to other employees at her new venture firm, Haun Ventures, while many of her investments will be in projects without formal boards. “I expect a very significant percentage of our funds will be invested in tokens,” Haun said.

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Venture capitalists pass on board seats to secure deals in hot crypto start ups Source link Venture capitalists pass on board seats to secure deals in hot crypto start ups

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